The American Rescue Act: Do Whatever It Takes

Yves here. Keynes was right. He said, more or less, that governments were unwilling to spend enough to pull themselves out of depressions, except to fight wars. We’ve seen that with the near-depression of the financial crisis. Not only was the stimulus too weak to produce anything more than a shallow recovery, but the rescue effort was misdirected, with too much going to the top of the food chain. That exacerbated one of underlying causes, wage stagnation for average workers. And to add insult to injury, Obama orchestrated the second bailout, that of the “get out of jail almost free” card of 2012 mortgage settlement, while doing just about nothing to intervene in 9 million largely preventable foreclosures.

By Steven Fazzari, Professor of Economics, Washington University. Originally published at the Institute for New Economic Thinking website

As Joe Biden takes over the presidency amid a raging pandemic, he is proposing another large economic rescue package. The price tag of $1.9 trillion is high. But the need is great and the relief will address critical human and economic problems over the coming months.

At the beginning of 2021, the U.S. economy is stalling, if not regressing. In December of 2020, U.S. payroll employment was 9.8 million jobs below its February 2020 peak. Although there was a fast recovery in jobs over the past summer and early fall, November’s job gain did little more than keep up with trend growth in the labor force and in December we lost140,000 jobs. Rising initial unemployment claims in the first weeks of 2021 and slowing retail sales suggest the coming months’ data will be weak. These outcomes are not surprising considering record levels in Covid-19 infections, hospitalizations, and deaths. But they signal an economy in need of help.

The American Rescue Act (ARA) contains many pieces; this post focuses on the macroeconomic impact of four large components: public health funding, supplemental unemployment payments, assistance to state and local governments, and “stimulus” payments to the majority of American households. I then consider the effects of the plan on US national debt. I conclude that debt concerns should not prevent doing whatever it takes to defeat the virus as quickly as possible and mitigate the economic effects of the health crisis, effects that disproportionately affect the most vulnerable members of our society.

Public Health Funding

Detailed numbers for the proposed American Rescue Act are still forthcoming but it is clear that several hundred billion dollars will be targeted for broad public health measures. These will be dollars well spent. Indeed, effective funding in the next few months for aggressive public health measures may well save the government money over the medium term.

The economic crisis is the public health crisis. The economy cannot recover until new infections drop to levels that make it safe for 330 million Americans to return to something like a normal economic life. Our inability, both by government mandate and sensible personal choice, to travel, eat out, shop, and even receive necessary medical care has destroyed trillions of dollars of American incomes (a dollar not spent by one person is a dollar of income not earned by another). When incomes fall, tax revenues fall, and tax revenue losses from the Covid-19 crisis are now in the hundreds of billions of dollars.

Any activity the federal government can fund to reduce the time it takes to escape the pandemic, even if just by a few weeks, will have huge economic benefits and help restore private incomes and the associated tax revenues. We need to do whatever it takes to accelerate the production and distribution of vaccines, continue to track vaccine effectiveness and provide tests on a vast scale to track the progress of the virus and ultimately signal a return to safety in the general population. The benefit / cost ratio of these activities on purely economic grounds is certainly favorable. And the value of lives saved, suffering mitigated, and fear relieved will swamp even large economic gains.

Supplemental Unemployment Benefits

The Covid-19 economic crisis has decimated the labor market. As mentioned earlier, despite a surprisingly strong initial bounce back in jobs from the April 2020 disaster, employment losses at the end of 2020 are still huge. The 9.8 million job deficit between February and December of 2020 is greater than the worst months of the Great Recession crisis, widely recognized at the time to be the worst economic downturn since the 1930s Great Depression. (At the employment trough following the Great Recession in February 2010, payroll employment was “only” 8.7 million jobs below the January 2008 peak.) A rising share of these job losses are permanent. Any significant recovery seems months away, even given an optimistic assessment of the vaccine rollout.

Unemployment threatens the ability of households to pay for their most basic needs: rent and mortgage, utilities, food on the table, basic medical care. Regular unemployment programs are stingy in most states. Wage replacement of less than 50 percent, in some situations much less than 50 percent, is common.

The struggles of unemployment magnify inequality, especially in this crisis. Data from the widely cited Opportunity Insights Economic Tracker show low-wage employment (less than $27,000 per year) to be 21 percent below pre-pandemic levels in late October and predict further declines to near 25 percent in early 2021. High-wage employment (greater than $60,000 per year) has fully recovered. In joint research with Ella Needler, we study how job losses in the Covid-19 crisis compare across various demographic groups. We consider both the extent of job losses at a point in time and how long they persist by first measuring the difference between the group’s number of jobs in February 2020 and the group’s job number for each crisis month. Then, we add up these monthly job losses over all months of the crisis (as of this writing, March 2020 through December 2020), to compute a statistic we call “job-months lost.” Finally, we compare a demographic group’s share of aggregate job-months lost to that group’s share of total employment in February 2020. For white workers, their share of job-months lost in the Covid-19 crisis is 13% below their share of jobs in pre-pandemic employment. For Black workers, job-months lost are 28% higher than their pre-pandemic job share. The job-months lost share for Hispanic women is 60% above their employment share and the job-months lost share for workers without a high school diploma is double their share in pre-pandemic employment. While all recessions have unequal effects, inequalities are magnified in the Covid-19 crisis compared with the Great Recession. These outcomes correlate closely with inequality across occupations and income/education levels as workers in lower-paid service sectors are the ones most affected and they have the least opportunities to work remotely.

Federal supplements are vital to mitigate the unemployment crisis, especially in the lower half of the income distribution in which under-represented minorities constitute a disproportionate share. The supplements are far from perfect, especially since they need to be administered through outdated state systems that have cracked and broken under the burden imposed by the crisis. But these federal supplements seem to be the best rapid response to unemployment we have at this time and they need to continue.

While the human impact of unemployment is the main reason to provide better unemployment support, broad macroeconomic concerns are also important. If the unemployed cannot pay for their most basic needs, they certainly cannot engage in even minimal discretionary spending. Their reduced spending destroys other incomes and tax revenue spreading the crisis further into the economy. These “multiplier” effects compromise jobs even in sectors that do not need to contract to contain the virus. They weaken balance sheets and threaten debt payments, and will slow the pace of recovery even after virus-induced lockdowns can be rolled back.

It is tragic and embarrassing that the federal government dragged its feet on extending supplementary unemployment benefits after the CARES act payments expired in late July 2020. And all should take note that there was no remarkable surge of jobs following this expiration. As so often before, job growth monotonically declined in the fall, contradicting claims that a large share of the unemployed were refusing to work because they wanted to enjoy excessively generous unemployment payments.

In late December, political motivation from the Georgia Senate runoff elections along with the acceleration of Covid-19 infections led to the reinstatement of much needed federal unemployment supplements, albeit at half the level of the effective CARES act benefits. This was a step in the right direction, but not nearly enough. These benefits expire in mid-March 2021. With vaccine rollout already behind schedule and infections hitting records in January, there is no way the critical need for unemployment supplements will much recede by March. The Biden administration is correct to push for enhanced unemployment benefits into September 2021. One can only hope the need will be much reduced by that time.

State and Local Government

In recessions, government spending and employment should serve as a buffer relative to declining private activity. The federal government clearly plays this role, but state and local governments are often forced to cut spending and jobs when their tax revenues fall because, unlike the federal government, state and local borrowing ability is tightly constrained.

For this reason, the federal government can play an important role in bolstering state and local government finance during a recession. In the Covid-19 crisis, this kind of action is particularly important to expand critical public health services.

Some critics point out that state and local revenues have not fallen too much in this crisis, less than the $350 billion proposed in the ARA. But state and local tax revenues stalled in mid-2019 and little recovery is likely in early 2021. I estimate a shortfall relative to the previous trend of about $300 billion through the second quarter of 2021. Perhaps even more ominously, the trend growth of state and local revenue has been exceptionally low since the peak before the Great Recession. After growing well above 3% at an annual rate over every business cycle since the late 1970s, state and local revenues (adjusted for inflation) grew at an annual rate of just 1.4% at from the peak before the Great Recession until mid-2019. This growth rate is inadequate to support the growing demands for local government services. The last thing we need as we try to climb out of this crisis is for critical government services to be held back because federal rescue funding is inadequate.

Stimulus Checks

The CARES act provided significant payments to most American households ($1,200 for each adult and $600 for each child; higher-income households were excluded or received smaller payments). The Consolidated Appropriations Act providing an additional $600 to each individual (including children) was signed by President Trump on December 27, 2020. But the lame-duck President belatedly argued the checks should really be $2,000 per individual and most Democrats immediately jumped on board. As a result, Biden’s ARA proposes to “top up” the $600 benefit already passed with an additional $1,400 per person, taking the total to the politically driven $2,000.

The justification for this policy is less clear than the critical need for public health and unemployment initiatives. But it does have merit. Let us consider three ways in which the checks can help.

First, unemployment supplements do not address all the household financial stresses of the pandemic. One obvious problem is child care with the shutdown of in-person school attendance. If a parent, usually the mother, needs to quit her job or delay returning to work to take care of kids and supervise remote instruction, she will not qualify for unemployment but the family’s income will decline. (Labor force participation is down sharply in the crisis, with a somewhat larger drop for women than for men.) Individuals with co-morbidities that raise the risk of Covid-19 infection and severity may be forced to quit their jobs, and therefore are not eligible for unemployment benefits. Some workers who remain employed may lose hours and overtime due to the slow economy. (Although down sharply from a dramatic spring 2020 peak, the number of workers in December who report working part-time due to a slack economy remained more than 2 million above the February 2020 level.) Lower-income workers without sick leave may have to forego income as they recover, or, worse, go to work when they are contagious. Also, for many workers, even enhanced unemployment benefits leave them well short of their pre-crisis incomes. It is impossible to account specifically for these, and undoubtedly many other, sources of household financial stress in the crisis. Widespread and substantial financial relief from the stimulus checks will mitigate these problems.

Second, stimulus checks to households will increase demand to some extent. In most recessions, economic recovery requires more household spending. This recession is unusual, however, because we do not really want people to spend more if spending more means increasing activities that increase the risk of infection. For this reason, a larger proportion of the stimulus payments have been saved than would usually be the case. Nonetheless, stimulus payments will likely induce some additional spending, again more in the lower parts of the income distribution where the effects of the crisis are most acute.

The third benefit follows from the relative weakness of the second. If households spend just a small share of their stimulus payments, they are saving a large share. This behavior will strengthen household balance sheets by reducing debt and increasing liquid assets. Healthier balance sheets will support a more rapid expansion of demand when the health crisis passes, boosting the speed of recovery. Again, inequality plays an important role. For those at the top of the income distribution who have kept their salaries and benefitted from remarkable asset price increases, stimulus checks will have little impact. But the balance sheet effect that will reach an additional $5,000 or more is significant for lower- and middle-income families.

Critics of the stimulus checks point out that these temporary payments are less effective in encouraging spending than, for example, a permanent household tax cut. They are correct, and if a permanent tax cut of several thousand dollars for the bottom three-quarters of the income distribution were on the table, I would favor such a policy over one-off stimulus checks. But one more round of checks seems to be the feasible policy at this point. It is less critical than shoring up public health, backstopping state and local government finances, and enhancing unemployment, but it is still helpful.

What About the National Debt?

Federal debt held by the public has increased from 80% of GDP at the end of 2019 to nearly 100% at the end of 2020. The additional measures passed in December plus the ARA may push the ratio to the neighborhood of 110% by some point in 2021. Conventional thinking, often referred to as “common sense” in political debates, suggests such a rapid rise in debt is a big problem and the fear of excessive national debt likely poses the primary political barrier to undertaking the much-needed steps described above.

But what are the actual consequences of a large increase in our national debt at a time like this? The cost of additional debt is interest paid to bondholders, assuming, as has been the case for many decades, bonds that mature are rolled over into new securities. These interest costs should be adjusted for inflation since future dollars represent less “real” consumption or production as prices rise.

Ever since the beginning of the crisis, the inflation-adjusted interest rates on 5-year and 10-year US Treasury bonds, the best measure of the “real” interest rate on new government debt have been negative. As of this writing, the 10-year inflation-adjusted bond yield is about -0.9% while the 5-year inflation-adjusted yield is -1.6%. These negative rates are stunning. They imply the borrower, in this case the US federal government, will be financially better off than if they had not borrowed at all.

But, since the debt will almost certainly be rolled over, what happens if interest rates rise? There are many ways to answer this question, none of which imply that the interest cost of additional debt incurred to finance ARA spending is much of a barrier. I will describe three important responses here.

First, even if interest rates rise some, the increase is likely to be moderate. Real rates on longer-term Treasury bonds have spent the vast majority of the past 15 years below (positive) one percent. Rates on short-term securities have been even lower. The Federal Reserve is very clear that it intends to keep rates as low as they are now for an extended period, and even if the Fed begins to raise rates, rates are very unlikely to exceed levels of the past decade. Government debt is very, very cheap.

Second, while the fiscal response to the Covid-19 crisis has been enormous by historical standards, these measures are temporary. We cannot know how long it will take for the combination of vaccines and natural development of immunity to finally suppress this nasty disease, but it will recede eventually. When that happens, the federal deficit will decline quickly and economic growth will accelerate. The result will be a return of the national debt-GDP ratio to levels dictated by long-term fiscal policy. If there is some modest excess interest cost burden due to emergency fiscal policies during the crisis, it will shrink over time.

Third, we need to consider what will happen to debt and interest costs if we do not implement policies to address the economic fallout from the crisis. In this case, in addition to greatly increased human suffering, the pandemic will be longer and the economy will be weaker at the end of the health crisis. Households will be in worse shape and more businesses will fail. Tax revenues will be lower and the growth path of the economy will be weaker, both of which imply a higher debt-GDP ratio even if we do nothing.

Fortunately, some parts of mainstream economic thinking appear to have learned the lessons of the past few decades that fiscal stimulus from a government that controls its own currency can be enormously helpful in containing economic crises. The United States and many other countries suffered more than we had to in the Great Recession due to overblown fears about too much government borrowing. We should not repeat that mistake now.

How Many Rescue Bills and for How Long?

The ARA is the third major fiscal rescue package to address the economic fallout from Covid-19 in less than a year. Critics will complain with, “Are you kidding me? Another major spending blowout?” While fiscal rescue fatigue is understandable, the underlying problem derives from uncertainty about the pandemic. Again, the economic crisis is the public health crisis.

The CARES act of late March 2020 anticipated that the pandemic would be winding down by mid-summer of the same year (as shown by the August 1 expiration of unemployment supplements). Sadly, this was not the case, so the fiscal rescue needed to continue. Measures that should have passed in the late summer were delayed until December. Economic stress was higher than it needed to be. It would be a stretch too far to blame inadequate economic support in the second half of 2020 for the tragic resurgence of infection, illness, and death in the final months of the year. But the economic stress certainly was damaging, especially considering how it magnifies unacceptable inequalities.

Exciting news about the effectiveness of the Pfizer and Moderna vaccines gives reason for hope. But vaccine manufacture is not instantaneous and distribution is complex. Uncertainty remains about long-term effectiveness. As I write, new strains of the virus seem to increase the rate of transmission. The economy is likely to be crippled for months and fiscal rescue on a large scale, once again, is very much necessary. Considering all the uncertainties, it is good for the ARA to extend its most critical component, supplemental unemployment, into September 2021. And we cannot be sure that another rescue package will not be necessary. It all depends on how long the virus holds the world hostage.

In World War 2, US government spending and associated debt expanded at an unprecedented pace. These actions were necessary in that existential crisis, and they were followed by decades of strong economic performance. As US deaths from Covid-19 overtake the levels our country suffered in World War 2, our federal government is correctly called upon again to do whatever it takes, this time to defeat the virus and support the economy for all American citizens. The American Rescue Act proposed by President-elect Biden is an important and necessary step in this direction.

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  1. The Rev Kev

    ‘The CARES act provided significant payments to most American households’

    Ah, this must be a new and novel use of the word ‘significant’ that I have been previously unaware of. What exactly did he think most Americans were doing with that $1,200? Investing it on the stock market? Saving it for their kid’s college education? Getting a new big a** TV for the living room? And this article was first published in the Institute for New Economic Thinking? Sounds more like the old economic thinking to me. At least he did not say that he was worried about overheating the economy with these payments like Larry Summers did.

    Going to go out on my skis here but here goes. He says that the price tag of $1.9 trillion in the next economic rescue package is high. Now the annual GDP of the US is what, $20 trillion? So the amount suggested then is about 10% of GDP. This may not be a great analogy but if I had a job that was paying 20 thousand a year and I found myself in a catastrophic situation, spending 2 thousand to try to pull myself out of that situation would seem reasonable. Maybe even trying to do it on the cheap. America getting back to its previous economic position will be like Lazarus with a triple bypass so now is not the time to go in cheap.

    I would dearly love Steven Fazzari thoughts on how every other developed country – and more than a few of underveloped ones – are paying their workers to get through the pandemic which has the effect of putting the economy into hibernation. Steven Fazzari’s way seems to be let the whole thing go as it can always be built up from scratch again. And I may have missed it but I find no mention of small businesses in that article which provide most employment and taxes on the local, State & Federal level. Here is an article showing how other countries are trying to get their people through the pandemic-

  2. Mr Broken Record

    What exactly did he think most Americans were doing with that $1,200?

    If my neighborhood was any example, it largely went toward landscaping. The services I contacted were booked solid, I couldn’t get mulch put down until July 4th weekend. I also saw a bunch of backyard projects.

    1. tegnost

      Hm. Sounds like first world problems to me…
      You do know those low wage landscapers were facing covid so you could get mulch. How many of your neighbors work from home and order most of their stuff online, protected from contact unlike the essential workers delivering their goods? I found this article incredibly weak overall. low wage is under 27,000, while high wage is over 60,000? This guy should get out more. A lot of workers, probably including many of the aforementioned mulchers don’t get unemployment unless they work for a big company. Adding that as a landscaper I can assure you that $1200 doesn’t go very far, but does go farther if you have an undocced crew living in close quarters with other poorly paid workers creating a petri dish for transmission(see the inequality of deaths between high wage and low wage), which is of course very common. No mention of the support given to huge corps with the PPP preventing layoffs and massive bond support keeping the big players passing gas in silk panties. No mention of lost insurance due to lost jobs. Do uber lyft instacart drivers even qualify for unemployment? Isn’t one of the main drivers (pardon the pun) of gig work that there is no need to fund unemployment/SS etc? He does at least get the duration approximated, which is certainly well into 2021, and that deficit spending is not the problem it’s made out to be. The closing statement about WWII is also widely off the mark. The shared dynamic of work in the 50’s and 60’s doesn’t even rhyme with the present working class reality, and this is the second massive disruption that not only shielded the upper class from discomfort, but substantially increased their wealth. Yeesh.

      1. Krombopulos Michael

        Yes, the 50s had manufacturing at home, as well as most of their competition being bombed flat and out of loop for years. You only needed 1 person working to support a household.
        Pessimistic me thinks there are greater issues:
        1. I suspect that the lockdowns will likely continue thru the rest of 2021. Worst case, the virus continues to mutate and we can never get a vaccine to work one-shot.
        2. I’m guessing some 30-40% of small businesses end up permanently closed and that the remainder will be stunted as to future growth potential. Most future business opportunities will come as being a franchise of a large corp or as a small appendage of the Amazon/Walmart beast.
        3. I also think the existing wars the US is in will increase in number and intensity, rather than fizzle out with the $$$ spent going towards domestic relief and rebuilding of crumbling infrastructure.
        4. Just as the “solution” for lost mfg jobs at the turn of the century was to go into the service sector, the new solution will be Universal Basic Income stipend and the unspoken fact that there will be a permanent net loss of service jobs with no replacement.
        5. Public pensions will openly fail to have enough funds to pay existing benefits. Two large ones, Teachers and Police have each had attacks on them in the past year. Teachers, who’ve spent the year demonstrating that it is viable to have classes conducted on Zoom. Of course, this now opens it up to the same kind of outsourcing and offshoring that parts of the tech industry have had for years. For police, the argument was to replace officers with lower paid social workers for not overtly violent calls. Let’s say the bulk of police work was on non-violent interventions (like 70%). One could argue you could cut out 50% of the $90K/yr police (and their heftier pensions) and replace with the same # of 35K social workers.
        6. Existing public infrastructure (school buildings, land, roads, parking meters, etc) starting to be sold off to private entities to cover current expenses.
        7. Full spectrum techno-tracking becomes the norm (name your favorite Philip K. Dick novel). Non-judicial stiff penalties and ostracism are typical for violations of varied (nebulous and ever-changing) rules made by private firms. Government and private company mining of data is unquestioned.

        I sincerely hope to be wrong with the above.

        1. Big Tap

          Sadly I think you’re mostly correct. Things are going to get worse. This pandemic just sped up this process.

    2. sj

      I was one of those who had landscaping done last summer. I too had to wait until mid July (which is not ideal for new plantings). I had saved for the very much anticipated work and nearly cancelled the project in order to keep that socked away money in my own savings.

      I changed my mind when I realized that landscaping crews have a short window for their earnings. And they needed those earnings more than I need the savings. I still get a twinge every now and then about not having those savings anymore, but I also still think it was my right choice. Plus my front yard makes me very happy now, so there’s that.

      And as tegnost says — $1200 doesn’t go very far in a project of that sort. Even if I had received a check. Which I didn’t. Because I fortunately make too much money to qualify. So I don’t think your neighborhood is a good example.

      So while you and I are sitting on a fine looking high horse, I suspect that most people wasted their check on things like rent/mortgage, food and other essential necessities of life. I’m very sure it helped them for that month. And hopefully also the next month. But it’s not doing a darn thing for anybody at this point in time.

      Anyway, another one-time check is an even smaller band-aid than it was the first time around because the wounds have gotten so much bigger. But a that band-aid is very much needed. And yet TPTB continue to think small when it comes to, you know, the citizens. It sounds to me like the author of the article is trying to break free of the old economic thinking, but it’s couched in so much milquetoast that it’s hard to tell. He’s still putting end dates on the unemployment provision, and assuming that the benefit is universal enough to do the trick. So I’m watching Andrew Yang with interest.

  3. Jeremy Grimm

    “The economy cannot recover until new infections drop to levels that make it safe for 330 million Americans to return to something like a normal economic life.”

    I am not sure just what “something like a normal economic life” will be like once the rate of Corona infections drops to a “safe” level. How much of what was a “normal” part of life will remain? The Corona pandemic has damaged and is damaging far more than the public health. The economic remedies in the CARES Act promise to make the damage permanent and growing as consolidations further criple the economy with monopoly rents. The US economy is riddled with serious structural flaws. The effects of the Corona pandemic place a spotlight on these structural flaws: the long fragile supply chains covering over a lack of production capabilities; the weakened, under supported, and inept Government at Local, State, and Federal levels; the deterioration the ability of our Medical Industrial Complex to provide health care; the lack of adequate safety-nets — or any safety-nets; the weakness of a “service” economy; the disproportionate power and influence of Big Money — which has been using the Corona pandemic as an opportunity to exploit ….

    At a time when our streets are filling with hungry and homeless, I cannot become concerned about whether another one-time shot of money or a boost in unemployment benefits will “stimulate” the economy or not — although I do wonder how checks will reach the hungry and homeless in our streets and informal Bomavilles. And while a tax-cut for the lower income levels would be most welcome I don’t see that as helpful to any but those who are or were recently among the employed. I am completely unconcerned about the National Debt although I do believe it might be a good time to revisit the ‘useful’ indirection of the National Government selling bonds to “pay” for debt. Who will benefit from the interest paid on those essentially zero-risk bonds at a time when all but the wealthy are concerned with more mundane matters.

    I worry very much about what happens when all the rent, mortgage, and any other accumulating payments due suddenly come due when the payment moratoriums end. I take some small comfort in hoping the American Rescue Act (ARA) might contain boosts to public health funding, and provide assistance to state and local governments. But I worry that the boosts will come too little and too late. I also worry about what else the ARA might tuck into its nooks and crannies.

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